I mean the concept, not the activity. Because it's the most confusing concept in macroeconomics.
Let's take a very simple macro model with no exports, imports, government spending, or taxes. There are four goods: a flow of newly-produced consumption goods C; a flow of newly-produced investment goods I; a stock of antique furniture A; and a stock of money M.
It's a monetary exchange economy. There are three markets: a market for C; a market for I; a market for A; and that is it. There is no market for M. Or rather, all the other three markets are markets for M, because all the other three goods can only be bought and sold for M. Barter is banned.
There is a tabu against using the C and I you have produced yourself. You can only use the C and I you have bought from someone else. So you want to sell the C and I you produce, and buy the C and I someone else has produced.
Just to keep it simple, there are no unsold inventories of C and I. You only produce C and I when a buyer appears with money and wants to buy some of your produce. Think of C and I as services, or goods made to order.
Income Y is defined as C+I. Y=C+I is true by definition.
Saving S is defined as Y-C. So C+S=Y is true by definition.
Therefore S=I is also true by definition. It follows immediately from C+S=Y=C+I, when you subtract C from both sides.
These all refer to actual quantities produced, bought and sold. All of that was accounting. Notice that A and M appear nowhere in those accounting identities.
This is the bit that people may miss: all of that was only true at the aggregate level. At the aggregate level it is true that income from the sale of C+I must equal expenditure on C+I. The aggregate quantity of C+I sold must equal the aggregate quantity of C+I bought. If an apple is sold, it must be bought. But that is not true at the individual level.
Let's repeat the accounting at the individual level.
An individual's income y, from the c+i that individual sold to someone else, can be used to buy c from someone else, or else saved s. What can an individual do with his flow of saving? In this model there are three things he can do with his income [I meant saving]: buy investment goods i; buy a flow of antique furniture delta(a) to add to his existing stock; hoard a flow of money delta(m) to add to his existing stock.
An individual's saving means anything he does with his income except spend it on newly-produced consumption.
Saving isn't a thing, it's a non-thing. It's a residual. It's defined negatively, as not consuming part of your income. So when an individual increases his saving, for a given income, all we know for sure is that he is reducing his consumption. He must be increasing something else, but we don't know what it is he is increasing. We know (in this model) that he must be: buying more investment; buying more antiques; or hoarding more money. But we don't know which. And it really matters which. As I shall show.
That's why "saving" should be abolished.
Having got that accounting out of the way, let's start thinking about Keynesian macroeconomics.
"What is the effect of an increase in desired saving by all individuals?"
What a badly-posed question. We know they all want to buy less consumption goods, but what of those three possible things do they want to do more of? The question does not say. So lets take all three in turn.
1. Investment. Demand for newly-produced consumption goods falls and demand for newly-produced investment goods rises by an equal amount. Total demand for newly-produced goods stays the same. So it's a wash. (Hush, you microeconomists, and Austrians!) No recession.
2. Antique furniture. Demand for newly-produced consumption goods falls, and demand for a flow of antique furniture increases by an equal amount. What happens?
This one's a bit tricky. To keep it simple, let's assume a representative agent model where everyone is identical so there is no trade in antique furniture in equilibrium. If everyone wants to buy more antique furniture, and nobody wants to sell, there's excess demand for antiques. What happens next?
Either the price of antique furniture rises to clear the market or it doesn't. If it rises to clear the market each individual will stop wanting to buy more antique furniture and will reformulate his plans. If it doesn't rise to clear the market each individual will be unable to buy more antique furniture (because none will find a willing seller) and will reformulate his plans. Either way he will reformulate his plans. He either chooses not to buy more antiques or can't buy more antiques, and so must do something else with his income instead.
If he reformulates his plans and decides to increase desired consumption back again there is no recession.
If he reformulates his plans and decides to increase desired investment there is no recession.
If he reformulates his plans and decides to hoard more money, see below.
3. Money. Demand for newly-produced consumption goods falls and demand for a flow of more money increases by an equal amount. Each individual wants his stock of money to be increasing over time.
Money is the medium of exchange in this economy. That makes it very different from antiques. If you want to increase your stock of antiques, you must persuade someone else to sell some of his. It's not something you can do by yourself. If you want to increase your stock of money, you just buy less. Nobody can stop you buying less. There's a recession.
You see? Even in this incredibly simple stylised economy, to talk about the effects of an increase in desired saving is incredibly confusing. All because saving is a non-thing. It can mean any one of three things, even in this incredibly simple stylised economy. And those three things have to be analysed in three very different ways and have very different consequences.
That's why "saving" should be abolished. Talk about something else instead. Talk about a switch away from desired consumption into more desired something else, and specify what that something else is. Because it matters.
Worthwhile Canadian Initiative 
A beautifully built “coffin” to the concept
It seems Nick that you are arguing that the concept of saving cannot coexist with Keynesian macroeconomics. I vote to abolish the latter.
Why didn’t Keynes come up with a way of dealing with this problem? oh wait. he did. it’s called liquidity preference. By the way it’s fundamentally misleading to claim that individuals demand newly produced investment goods. Individuals seek out consumer durables and higher nominal yields on assets. In a monetary economy that doesn’t have to have anything to do with producing investment goods. part of that savings may be used to purchase equities or bonds but that isn’t necessarily used to produce investment goods. Instead, firms invest in new capital when they think they will need more capacity to meet consumer demand in the future. Investment responds to effective demand, or as Keynes said, Investment creates savings, not the other way around. Just because financial investors shift in and out of financial products of corporations who hold investment goods as assets doesn’t mean the increased savings is creating demand for investment goods. We should keep the concept of savings.
Thanks Marcus!
So Bob, when an Austrian talks about “an increased desire to save”, what do you normally understand by that? We know it means a fall in the demand for newly-produced consumption goods. But what do people plan to do with their income instead? What do they demand more of? Antique furniture?
To be pedantic in the analysis of (3): Once we look at the scenario where money stock is increased, do we need to go back and ask whether the C market will clear at the new, lower demand? This is analogous to the case-by-case analysis of the antique market. If C sellers are willing to lower their offer prices, then the C market would clear. Would that mean no recession? Just an adjustment to a lower price level?
Good post–I have a new one too.
Nick
I think the way to solve this issue would be to convert each element of Keynesian liquidity preference and IS/LM into Monetarist thinking, like the equation of exchange.
Nathan: “By the way it’s fundamentally misleading to claim that individuals demand newly produced investment goods. Individuals seek out consumer durables…”
Consumer durables are investment goods. Even Statistics Canada treats some consumer durables, namely newly-produced houses, as investment.
You want to introduce bonds, and firms too Fine. But that just complicates the meaning of “saving” still further.
And I don’t remember antique furniture in the General theory. You can’t leave that out. We buy lots of goods that are not newly-produced goods. Land, old houses, old cars, etc. Why this Keynesian fetish for the new?
Nick Rowe wrote: So Bob, when an Austrian talks about “an increased desire to save”, what do you normally understand by that? We know it means a fall in the demand for newly-produced consumption goods. But what do people plan to do with their income instead? What do they demand more of? Antique furniture?
Nick do we need to abolish the concept of “hunger”? I mean, you know it means I want to eat, but what? Burgers? Antique chairs? It’s so imprecise.
It’s disingenuous to say that Keynesian macroeconomics has a problem with ‘desired savings’. I think you probably mean Neo-Keynesian economics.
Keynes covers exactly this question in the General Theory. The only difference is that for antiques he uses existing capital goods.
Keynes points out that money is a liability of some other agent, which must therefore have an offsetting asset. Money can either be a liability of the government (but you have no government in this model) or of a bank. That means the bank’s ability to accept your deposit (and your willingness to accept the bank’s deposit as money) is dependent on the bank finding an offsetting asset (someone to lend the funds to). That borrower will presumably use it to build new capital (I). The future production of goods and services from the building of that capital good (I) will allow the borrower to service the bank loan which gives the savings value.
In terms of the problem with antiques, their purchase simply leaves someone else with the money and doesn’t change the fact that the seller must either decide to spend the money on C, employ labour and resources to build new capital (I) or leave it in the bank and ask them to find someone to borrow the money. The purchase of antiques doesn’t destroy money and it doesn’t act as a saving because antiques have no guarantee of future cash flows, they’re only worth what the next person will pay for them.
Keynes’s point is that saving is always a residual of what is left out of income that isn’t consumed on currently produced goods and service. But people are only able to save that leftover income to the extent that someone else is prepared to borrow the money and spend it on I. If no one is prepared to borrow the money, then incomes will fall. It is I that determines how much we can save, not C or Y.
Keynes’s argument is vastly more nuanced and detailed than my attempt above so please excuse any simplification.
Strikes me the whole problem solved by making it clear when using the word “saving” whether one is referring to saving money or saving up real assets (i.e. increasing investment).
while youre at it, you can also abolish sovereign debt…too many economists confuse it with household debt…
Nick, I’m pleased to report that the index to Bénassy’s macro textbook does not include the word saving. There is one passing reference to the savings rate, in the context of the Solow growth model. It’s also gratifying to note that there is no reference to the quantity theory of money or the velocity of circulation. Little by little the garbage is being cleared out.
So isn’t the disagreement about what happens if in 3. the central bank accommodates the rising demand for money?
If in this case there is no paradox of thrift, then wouldn’t it mean that there is no scenario where there is one?
“Saving” should be abolished … I mean the concept, not the activity. Because it’s the most confusing concept in macroeconomics.”
No.
“An individual’s saving means anything he does with his income except spend it on newly-produced consumption.”
No.
It does not “mean” that at all.
Saving stops at the point where saving has been measured as a subset of income.
Whatever follows in terms of economic decisions is not saving. It is something entirely different.
Saving is a MEASURE of income – specifically, a measure of a defined subset of income.
In your defined economy, at the individual level, it is the measure of what is left of income following whatever portion is spent on consumption.
You can’t use a MEASURE to “do” something else. It is what it is.
So, individual saving is the act of not spending income on newly-produced consumption goods.
Saving is NOT the act of doing something beyond that. The act of saving is entirely separate from anything that follows saving.
Furthermore, before you identity what “happens” by way of economic decision next after saving, you must identity the additional, AUTOMATIC CONSEQUENCES of saving in ALL cases. In a monetary economy, that depends on your assumed monetary infrastructure. (My personal view is that it would be hopeless to attempt any useful exercise in monetary economics without this step, but I’m not a monetary economist. And I gather that’s not what you guys think, particularly those who delight in solving monetary problems by avoiding references to banks.)
To make things simple, at this step anyway, I usually think of the monetary infrastructure as a banking system without any additional forms of financial intermediation.
So the automatic consequence for an individual who saves is that his bank deposit account increases by the amount of saving.
(And if you want to assume for some reason that the money supply can’t increase at the macro level, that is simply a non-starter unless you assume further forms of financial intermediation or that aggregate saving is zero or that old loans are paid down. It is relatively easy to deal with all sorts of permutations in this area, using accounting, but for the purpose here, just assume that banks can perform a lending function to generate new money as required in order to create the necessary initial accounting match of a financial stock (bank deposit) to an economic flow (saving) at the micro and/or macro level.)
The next question is what does the individual do by way of further action to change the level of that bank account. THIS HAS NOTHING FURTHER TO DO WITH SAVING. SAVING IS DONE. FINI.
So the individual has a bank account from which he can decide to invest, hoard, or buy antiques A.
At this point, we are not finished with the accounting at all, Nick, which is the problem here.
What we’ve seen so far is income accounting.
What we’re about to get into is either additional income accounting, or flow of funds accounting that has no effect on income accounting whatsoever.
In the case of either investing in I, or hoarding, resolution of income accounting is required as a next step. Whatever happens at the micro level, and with the help of some standard Keynesian type macro thinking and accounting, the numbers must simply add up at the macro level such that C + I = C + S. Such an accounting outcome is assured one way or another. How you get there is a matter of both economics and corresponding accounting iteration. But the reconciliation gets done. And with the case of hoarding, recession risk obviously comes into play.
In the case of antique buying, you get into flow of funds accounting. There is no income accounting involved in this whatsoever.
Antique buying is an asset swap that has nothing to do with income.
So that’s the accounting framework from which to start the analysis of monetary and real economic effects.
And you can do all your required monetary analysis using that framework.
And Nick, your monetary analysis is no doubt perfect, but you can’t do it properly without starting from the proper definition of saving – a definition that has absolutely nothing to do with antiques.
And I have to say that I see nothing terribly complicated about inserting flow of funds scenarios like potential or actual antique buying into the mix and determining what that means for money hoarding stages and possible further decisions that do or don’t have further consumption and measured saving effects. That sort of analysis is not impeded at all by proper accounting.
BTW, my version of “the bit that people may miss” is that it is essential to understand that saving can be negative at the individual level. And it can be negative at the level of all individuals in a given economy. And it can be negative in any sector in that economy – private or public. And it can be negative in a country. But it can’t be negative for the world.
Corollary: the fact that you can’t “use” negative saving to buy antiques is a specific case of the fact that you can’t “use” saving, positive or negative, to buy anything. That’s not what saving is or does.
Finally:
“Saving isn’t a thing, it’s a non-thing. It’s a residual. It’s defined negatively, as not consuming part of your income.”
It’s not a non-thing. It’s a measure of a subset of income. And it is a residual in that sense, but so is the world except for Nick. And that’s no small thing.
To be perfectly honest Nick, I think you have argued yourself into a hole. You have just proved that we can in fact ignore A and concentrate only on C and I and S. A makes no difference – its a red herring.
But yes M does make a difference – but we already knew that didn’t we? Find me a modern Keynesian who thinks otherwise.
Actually I take that back, A could matter – if it was exported or imported! But the foreign sector wasn’t part of your model – was it?
Nick,
So long as you’re at it, how do individuals/corporates actually hoard money? Apart from the actual cash in the wallet (which can easily be assumed to be constant), all cash or money is short term liabilities of the banking system. To that extent, whether this saving is hoarded or invested is a function of
1) Investment/ credit demand.
2) Risk-bearing capacity of the banking/financial system.
3) Regulatory ratios imposed by the central bank.
What ‘choice’ does the individual saver have in this?
Wow! Lots of comments.
Let me first do one general response:
There are lots of different ways we can divide up the world into categories see Borges on “animals” http://en.wikipedia.org/wiki/Celestial_Emporium_of_Benevolent_Knowledge%27s_Taxonomy
Which would be the most useful way to divide up income, and define saving?
Which of these 3 definitions of desired saving is the most useful?:
S0: Sd=Y-Cd (Standard)
S1: Sd=Y-Cd-Id (All income from the sale of newly-produced goods minus demand for all newly-produced goods.)
S2: Sd=Y-Cd-Id-deltaAd (All income from the sale of newly-produced goods minus demand for all goods)
The answer depends on the economic theory we have. I would say that S2 is the most useful. But I can see some Keynesians consistently argue that S1 is the most useful (I think some MMTers do this, in effect?)
Great post!
I think this functions well as a reply to Scott Sumner’s recent post:
http://www.themoneyillusion.com/?p=12596
Notice also that the recent debate about the burden of the debt was also an example of the “Borges Problem”. Do we divide the future up into time periods or into cohorts? We get very different results depending on how we categorise the world. And sometimes the categories we use are chosen by someone long ago who had a totally different purpose and/or a totally different theory to ours. Our way of seeing the world gets distorted by the dead hand of historical ways of seeing.
@Noah Smith: maybe, but David Glasner’s reply is better: uneasymoney.com/2012/01/11/scott-sumner-goes-too-far/.
Noah: Thanks! Yep, I wrote it after reading Scott’s post and all the comments on that post. The underlying problem is that the Keynesian version of the Celestial Emporium of Benevolent Knowledge just doesn’t fit with Scott’s way of viewing the world. (No doubt vice versa too).
Phil: I left this comment on David’s blog:
David: “Income and expenditure are not identically equal to each other; they are equal in equilibrium.”
No. Actual income and actual expenditure are identically equal to each other.
“One way to see this is to recognize that there is a lag between income and expenditure.”
If you mean that an individual’s desired expenditure depends on his lagged income, that is a behavioural assumption that may or may not be true. I would say it depends both on his lagged and on his expected future income.
“Actual income and actual expenditure are identically equal to each other.”
Nick, that’s a bit like saying that 2+2 and 4 are identically equal to each other. An identity, as I have always used the term, is an equation such as x(y+1)=xy+x. Is there a good reason for departing from such terminology? Scott Sumner is creating a dreadful muddle I think. But what the hell, it’s your profession. Make what you will of it.
“3. Money. Demand for newly-produced consumption goods falls and demand for a flow of more money increases by an equal amount. Each individual wants his stock of money to be increasing over time.”
People need money to pay their debts. So an increase in the demand for money doesn’t need to involve wanting to increase a stock of money, but rather a credit squeeze.
Kevin: “Nick, that’s a bit like saying that 2+2 and 4 are identically equal to each other. An identity, as I have always used the term, is an equation such as x(y+1)=xy+x.”
No. In this case, since I haven’t given a number for either of Y, C, or I, when I say that Y=C+I is an identity that is exactly like saying x(y+1)=xy+x is an identity. My preferred example is: the number of anyone’s sons + the number of his daughters = the number of his children. That’s an identity. I haven’t said who he is, or how many sons or daughters he has.
Max: “So an increase in the demand for money doesn’t need to involve wanting to increase a stock of money,…”
Yes it does. By definition.
Income equals consumption in the long run. Therefore, saving is really just deferred consumption. Would you be happier if we just called it ‘deferred consumption’ (while dissaving could be ‘advanced consumption’)?
Nick,
Just wanted to say that in the S and I haze that has befallen the econo-blogosphere, you have brought clarity to at least one person.
Thanks and keep up the great work for econ autodidacts like myself.
Noah Smith, You said;
“I think this functions well as a reply to Scott Sumner’s recent post:”
I think Nick and I see this the same way, unless I’m missing something.
JKH, your post is nonsense. Are you really criticizing the model for not having banks? Models with banking are very important, but Nick is trying to illustrate an important point here. Do not just say what doesn’t happen to your income. Let’s enumerate the things that could happen and see the consequences of each.
If your going to be combining stocks and flows, then your going to need some PERIOD(s) in your analysis. Only then can we make statements about how the stock at some point P at the START of the period relates to the stock at P at the END of the period. [It is possible to avoid periods entirely and just analyze a flow diagram, but you can only study rates this way. You can’t study stocks.]
When Nick says “an individual’s savings means…,” he means the change in an individual’s savings over a period is the portion of P’s income (his in-flow) which he did not spend on consumption goods (one particular kind of out-flow). That’s it. No more, no less. For this model, we don’t care whether he used a bank, used his mattress, wired money around telepathically, etc. “Savings for the period” has been defined.
Now Nick’s further goal is to DECOMPOSE the saved amount. We know income flowed in, and some consumption money may have flowed out. Where’s the rest? Nick lists three possibilities. The money could have flowed out for NON-CONSUMPTION goods (in this case, either I or A). Or, it could have STAYED with P (increased his cash balance). Nick’s point is that there is a lot of confusion that arises in macro discussions simply because various sides don’t specify what particular decomposition is being discussed. So why not avoid the confusion? Say WHERE you think the money went, and the other side can evaluate your points with this in mind.
What is descibed above is a measure.
Not sure why you think antique buying does not involve “income accounting.” The purchase money is part of the antique seller’s income for the period. There is nothing magical about antiques. Before the period, the antique holder’s balance sheet showed the antique as an asset. Now it shows cash as an asset [provided the holder did not spend the sale money on something else.] He must decide what to do with income just like everyone else. If he wants, he can even buy back some antiques. You can still have entrepreneurship in this model, where antique speculators try to forecast future antique demand.
Thank you. Helpful.
Of course, the textbooks are written, so maybe you need intermediate terms. Perhaps just leave it as “national saving” and “individual saving”. Or perhaps just call it non-consumption.
Then you can say
production = consumption + non-consumption
And who can disagree with that? At least it clarifies what Keynesian’s mean. Then at the national level we can have an argument about what “non-consumption” means.
If, in Steinbeck’s grapes of wrath, we dump truckloads of produce into the ocean to avoid depressing the price, is that consumption or investment? 🙂
More importantly, the term “money” should be abolished.
Are not people consuming and investing eunough?
Well – then we shold have a lower interest rate (which will decrease the rate of return on all financial savings such as bonds, stocks, money etc.).
You say what? The US happen to control the interest rate through money aggregates (unlike many other central banks who simply set the interest rate directly)? So? Why does it matter wheter they puch a button or is pulling a lever? The point is that the FED is controling the interest rate. “Money” is a red herring.
There are two kinds of income, nominal and real. I cannot spend my nominal income on money, but I can spend my real income on money. To increase my money balances by $50, I must refrain from spending $50 of my nominal income, but I must also spend $50 of my real income. This difference is what makes money special. To acquire anything but money, I must spend both my nominal and real income on whatever that thing is, but with money I only spend my real income.
The problem is that if, on average, people try to spend more of their real income on money, they must refrain from spending as much of their nominal income. In the short run, falls in nominal income cause falls in real income, since prices do not adjust immediately. Therefore, we get a recession. None of this is true for anything but money.
Lee: “Would you be happier if we just called it ‘deferred consumption’ (while dissaving could be ‘advanced consumption’)?”
That might be a good idea. I can’t make my mind up. But don’t we still need to ask: “OK, and what asset are you planning to hold in the meantime?”?
Dunno.
Scott: “I think Nick and I see this the same way, unless I’m missing something.”
I don’t see any obvious big differences. But I do have to “read between the lines” a little, on whether you are talking actual or desired. The difference is that I am a lot more comfortable switching into a Keynesian worldview than Scott. It’s a much more familiar landscape for me.
(And I agree with your point that “saving” may be a useful concept in a long run growth model, where we can ignore money and recessions, and so these problems don’t arise. Hang on, but even then we might want to look at questions like “saving” in the form of land, or antiques, as in the so-called “Junker Fallacy”?)
The problem here – as perfectly exemplified by the above discussion – is that “saving” has several meanings, and that it takes a day or two of conceptual clarification before we can be entirely clear what each person has in mind when they use the term. This is true even among fairly economically literate people. In particular:
– sometimes “saving” is used to refer to individual decisions, at other times to macro aggregates
– sometimes it refers to real capital and at other times to financial assets
– sometimes it refers to macro flows, sometimes to asset stocks
– sometimes it is treated as a residual, at other times having causal significance
To add fuel to the fire, different theoretical perspectives often offer radically different views on the links between macro and micro, how the real and monetary are linked, and consequently causality. And this in turn often swings on whether you start with an economy at full employment, or one with underemployed resources.
The result is a total conceptual mess. The concept of “savings” lies at the intersection of all those things that make economics tricky. We could not have chosen an analytical category more prone to cause confusion if we had tried. I’m all for getting the concept out of economics, and instead focussing on consumption and investment, where the scope for confusion, while far from zero, is rather less.
Statsguy: “If, in Steinbeck’s grapes of wrath, we dump truckloads of produce into the ocean to avoid depressing the price, is that consumption or investment? :)”
Damn! Hard question. Is it consumption, investment, saving, or neither??
It is exactly when you face weird questions like that that you see that the definitions we use and the Celestial Emporium of Benevolent Knowledge categories we use may make sense in one context but be useless in another. And it’s better to start from scratch and just build a model in which grapes get dumped into the ocean and make up whatever definitions and categories that fit that example most usefully.
mr miyagi: thanks! Makes it all worthwhile.
erik: if you abolish “money”, then are you talking about a barter model? Because that model would be very very different from the quasi-Keynesian model I have sketched above.
“In this case, since I haven’t given a number for either of Y, C, or I, when I say that Y=C+I is an identity that is exactly like saying x(y+1)=xy+x is an identity.”
Sure, but I can’t see what makes you think David Glasner disputes that. The confusion arises because there are apparently people out there who think that Y(N,K)=C(Y)+I(r) is an identity.
Damn this is sounding remarkably familiar. 😉
Put more simply, perhaps:
On the macro level, the proportion of individual saving to spending has no impact on the quantity of net financial assets. Because savings is simply not spending. And spending just transfers financial assets from one person’s/business’s account to another. Net zero.
The stock of financial assets can only increase or decrease via government deficit surplus, or net imports/exports. MMT World.
This also means that the stock of “loanable funds” is unaffected by the individual spending/saving proportion.
It seems to me that there’s another big source of confusion (simplifying here): real goods can be consumed (both C and I; they’re both consumed eventually), so there’s a linear flow/”supply” of them. Financial assets cannot be consumed. There’s no linear supply; only circuits. Which makes the “demand” for financial assets a very different concept, one in which I, at least, find S/D diagrams very problematic as explanatory models.
marris: “To be pedantic in the analysis of (3): Once we look at the scenario where money stock is increased, do we need to go back and ask whether the C market will clear at the new, lower demand?”
Yep. I was implicitly assuming sticky prices for C and I. Should have made that explicit. (But I did say it was Keynesian macro, so I think it’s understood.)
Bob: “Nick do we need to abolish the concept of “hunger”? I mean, you know it means I want to eat, but what? Burgers? Antique chairs? It’s so imprecise.”
If what we wanted to eat made a big difference to whether or not it would solve hunger at the macro level, we would need to be more precise. For example, suppose the aggregate supply of apples is perfectly inelastic and the aggregate supply of bananas perfectly elastic. Either would solve an individual’s hunger but only bananas would solve world hunger.
spam filter is playing up again. so if your post doesn’t appear, that’s probably why. i just rescued 2.
What to you call it when someone choses to switch the use of short term production good which produces an inferior output into a longer production process that produces superior output?
Your immediate consumption ISN’T REDUCE ONE BIT .. what changes is your ability to consume and invest in the future …
Just one more Keynesian / macroeconomic fallacy put on the table .. when can we address these?
We can expand our savings by changing the consumption and investment patterns in the future, without changing them in the present.
Maybe Robert Murphy can make us an Excel spread sheet. Economists seem to need them.
Nick writes,
“Saving isn’t a thing, it’s a non-thing. It’s a residual. It’s defined negatively, as not consuming part of your income. So when an individual increases his saving, for a given income, all we know for sure is that he is reducing his consumption.”
With Rothbardian “macro” accumulationg money balances is different from saving. Income can be used for buying consumer goods, buying assets (or paying down debts, I guess,) or accumulating money.
The interest rate has to do with saving and investment. The purchasing power of money/price level has to do with the supply and demand for money.
In my view, money is an asset too (and generally a financial asset) and so accumulating it is saving.
You are correct that saving isn’t a thing, but rather a difference, but saving implies an increase in net worth. You must accumulate assets or reduce debts. Most of these things impact financial markets in ways that pretty directly impact prices and yields (though maybe not antiques.) Accumulating money balances, or paying off debts in a way that reduces the quantity of money don’t have that effect and that is a source of difficulty.
To me, this is just the right way to look at the world.
It is true that it doesn’t highly monetary disequilibrium as well as the Rothbardian approach where money is in its own category.
my god nick i agree with your head line one thousand percent
savings is a calvinist household virtue
not a macro economic category
Statsguy: “If, in Steinbeck’s grapes of wrath, we dump truckloads of produce into the ocean to avoid depressing the price, is that consumption or investment? :)”
That’s not anything from a GDP accounting perspective, right? It’s not changing GDP, it’s not traded, GDP accounting is totally blind to it. In a direct sense, if you bought those grapes from someone else, then it counts as consumption. If you grew them and destroyed/consumed them yourself, that doesn’t get counted in GDP at all.
The idea that “savings” in the normal human sense of accumulating wealth doesn’t actually have much to do with S in the GDP accounting identity is the key point here, to me at least. If I take my income and put it under the bed, that decision just never shows up as the GDP accounting version of Savings. It’s not adding to GDP at all, why would it show up there?
Two typos fixed:
What do you call it when someone choses to switch the use of short term production good which produces an inferior output into a longer production process that produces superior output?
Your immediate consumption ISN’T REDUCED ONE BIT .. what changes is your ability to consume and invest in the future …
“Why this Keynesian fetish for the new”
the social opportunity cost of non production
is very much greater then non exchange
more or less stuff is at stake
not just its distribution
“It seems to me that there’s another big source of confusion (simplifying here): real goods can be consumed (both C and I; they’re both consumed eventually), so there’s a linear flow/”supply” of them. Financial assets cannot be consumed. There’s no linear supply; only circuits. Which makes the “demand” for financial assets a very different concept, one in which I, at least, find S/D diagrams very problematic as explanatory models.”
I’d be curious to here Nick’s response here. This might (or might not) be expressing what I am trying to saying about the interest rate on govt debt, that combined with the fact that only the govt can change the net amount of financial assets. Our past convos (and with vimothy) sort of dead end here, where Nick says most economists believe in the S/D loanable funds model for govt liabilities (and the natural rate, etc).
Nick, I object strenuously to your headline. We can’t abolish “saving”–it’s one of my favourite subjects to sit and ponder over. And if I have nothing to ponder over, what excuse do I have for drinking this glass of whiskey? I vote that we keep “saving”–that way, you get to write more blogs about it, everyone else gets to read ’em, and I get another dram of Laphroaig.
When I think of saving, I think of an individual not spending his income, or equivalently a country adding to its stock of (human/nonhuman/tangible/intangible) capital. Basically, delta “net wealth” > 0 in either case.